Chapter 5 - Portfolio risk and return
- 10.625%
- parts 1-4 (see below), parts 5-6. Note that as A goes up, B goes
down – correlation is negative. Therefore, there appear to be some
diversification benefits. Risk goes down quite a bit with little change
to average return.
| Year |
Return on A
|
Return on B
|
Portfolio |
2009
|
13% |
20%
|
16.85 |
| 2010 |
13 |
19 |
16.3 |
| 2011 |
15 |
15 |
15.00 |
| 2012 |
16 |
13 |
14.35 |
| 2013 |
16 |
12 |
13.80 |
| 2014 |
20 |
11 |
15.05 |
| Avg |
15.50 |
15.00 |
15.23 |
Std Dev
|
2.59 |
3.74 |
1.16 |
- Parts 1-4 see below, parts 5-6 The correlation between PQ is -1,
while the correlation between PR =+1. Therefore, there are no
diversification benefits for PR – note that the risk is the average
risk of the individual securities (this only works when correlation =
+1). There is perfect diversification for PQ since correlation = -1.
| Year |
Asset P
|
Asset Q
|
Asset R
|
PQ |
PR
|
2009
|
10%
|
14%
|
9%
|
12 |
9.5 |
| 2010 |
12 |
12 |
12 |
12 |
12 |
| 2011 |
14 |
10 |
15 |
12 |
14.5 |
| Avg |
12 |
12 |
12
|
12 |
12
|
Std DEv
|
2 |
2 |
3 |
0 |
2.5 |
- Doesn’t enhance return and risk is not zero
|
|
Year
|
Asset P
|
Asset Q
|
Asset R
|
PQR |
2009
|
10%
|
14%
|
9%
|
11 |
| 2010 |
12 |
12 |
12 |
12 |
| 2011 |
14 |
10 |
15 |
13 |
| Avg |
|
|
|
12 |
Std DEv
|
|
|
|
1 |
- average returns are always between 8 and 12% regardless of
correlation. The more invested in A the more the return is toward 8%.
- when correlation = +1, there are no diversification benefits. The
risk will be between the risk of the individual securities – between
6-10%
- if correlation = 0, the risk may fall below the 6% (the less risky
security) but the risk will never be zero. Also, the risk will never be
above 10% (the most risky security).
- if correlation = -1, there is one portfolio with A and B that
actually eliminates risk completely (std dev = 0). So risk is between
zero and 10%.
- Jimmies should offer a higher return since it is riskier (its beta
= 1.3). Since Sprinkles offers higher return for lower risk, choose
Sprinkles.
- If you were completely clairvoyant and you could perfectly predict
when a rally was coming, you might pick the stocks that are likely to
rally the most. Beta is a measure of the sensitivity of a stock’s
return to changes in the market. If the beta of Jimmies is 1.3, then it
is expected to move more than the market.
- 0.3333
- 1.04
- r(P)=9.6%, r(Q)=11.55%, r(R)=8.8%, r(S)=16%, r(T)=11.5%
- He should invest. CAPM say return should be 3 +1.2*(10-3)=11.4. If
he expects 12% return, it more than compensates for the risk in the
security.
- Efficient portfolios are the ones that offer the highest return for
each level of risk. A, D, and F offer the highest returns for their
level of risk. Note that there are some portfolios which can be formed
by combining D & F. Combining D & F would dominate all other
portfolios given. Note that portfolio G will not be chosen since F
offers higher return for less risk.
;) (i) correlation = +1, (ii) correlation is negative, (iii) correlation is -1, (iv) correlation is positive- If correlation =0.7
Stock
|
Bond
|
Return
|
Risk
|
| 0% |
100% |
8.00% |
20.00% |
| 25 |
75 |
9.75 |
22.03 |
| 50 |
50 |
11.50 |
25.52 |
| 75 |
25 |
13.25 |
29.96 |
| 100 |
0 |
15.00 |
35.00 |
If Correlation = -0.3
|
Stock
|
Bond
|
Return
|
Risk
|
| 0% |
100% |
8.00% |
20.00% |
| 25 |
75 |
9.75 |
14.93 |
| 50 |
50 |
11.50 |
17.36 |
| 75 |
25 |
13.25 |
25.21 |
| 100 |
0 |
15.00 |
35.00
|
- 2.00
- stock is expected to earn less than required (9%<10%). It is a bad investment
Chapter 6 - Fundamental analysis
-
- Asset mgmt: TATO=1.11, cannot calculate DSO or Inv TO
- Debt mgmt: Debt ratio=55.6%, D/E=1.25, eq. mult=2.25, TIE=5.0
- Profitability: PM=10%, ROA=11.1%, ROE=25%
- Liquidity: Curr. Ratio = 1.0, cannot do Quick ratio since current assets do not present inventory separately
- A. 30%, b. 60%
- 107,143
- D/E=2.33, eq. mult=3.33
- 75%
- A. 5.0, b. 0.5
- 920,000
- 80
-
- 110.96
- 105.48
- 316.44
- 591.44
- 8.45%
- 416.67
- 69.29
- +70,000
- 878,400
- 2,400,000
Chapter 7 - Stock valuation-
- $4.01
- 1.50
- $1.67
- $7.2 million
- $22.22
- $4.8 million
- $1.09
- 52.36
- 98%
- $76.16
- 18.72%
- No the intrinsic value is $30, but it would cost him more to buy the stock in the market
- $77.72
- 26.10%
- $77.14
- $99.51
- 29.03%
- $115.08. Yes it is a good investment. Our analysis shows we think it is worth more than market price and we expect to earn a higher return than required.
- $156.75, 25%
- $13.10
- 36.91
- 39.20
- 6.2% cg yield and 3.8% div yield
- 5% cg and div yield
- $30.15
- 13.78%
- Some assumptions need to be made. If you assume that sales increase at 25%, the profit margin is 10%, and the dividend payout ratio is 40%, you get intrinsic value of approximately $187.
Chapter 8 - Technical analysis- 0.49
- 1.33, 3.33, and 0.40. Day 3 was the most bullish since the average volume of trades for advancing stocks was the highest.
Daily Breadth
| Adv/Dec Line
| +231
| +231
| | +50 | +281 | | +5 | +286
|
- -20,000, -50,000, +50,000. OBV has fallen from 60,000 to 50,000 – a slight bearish number.
- Whenever the stock price falls below the MA – this is a sell indicator. As the stock goes above MA, buy.
| Day | Price | Moving Avg
| Indicator | | 10 | 27.5
| 27.55 | | | 11 | 29 | 27.95 | Buy | | 12 | 29 | 28.25 | | | 13 | 31.5 | 28.65 | | | 14 | 32 | 29.00 | | | 15 | 31 | 29.30 | | | 16 | 33 | 29.70 | | | 17 | 28 | 29.70 | Sell | | 18 | 28 | 29.50 | | | 19 | 26.5 | 29.55 | | | 20 | 26 | 29.40 | |
Some Questions from Baseline (Chapters 5 through 8)GE
|
I did the Baseline exercises for GE, and was wondering if people wanted to compare/confirm any of my answers:
1) 1.08
2) $1490
3) 1.903
4) 708.38
5) 10.96% (11%)
6) $11.57
7) 2.97
8) 1.96
9) 9%
10) 6.33%
11) 5.47
12) 8.3%
13) I think it's 7.9 cents per year increase, but I'm not sure how to convert this to a growth rate??
14) 3.9%
On Chapter 5 portfolio topics, would we get to use excel on the exam? Do we need to calculate standard deviation by hand?